Markets / Economy

[Mike R]

Oil as in turn gas prices are likely to go back up soon. Last I heard the Russians and OPEC are agreeing to slash production.

 

[Uwe]

Oil as in turn gas prices are likely to go back up soon. Last I heard the Russians and OPEC are agreeing to slash production.

World-wide demand is down 30%. I have yet to hear of a deal that reduces world-wide production by anywhere near 30%.

Of course really low prices will remove the marginal (high-cost) producers from the market, for example the shale drillers in the US, and those guys are leveraged out the wazoo with debt....

-Uwe-

 

[PetrolDave]

World-wide demand is down 30%. I have yet to hear of a deal that reduces world-wide production by anywhere near 30%.

Lunchtime TV news in the UK said demand is 30% down but production (even after the agreement last week to cut production) is only 10% down.

So the problem of nowhere to store the 20% excess oil coming out of the ground isn't going to go away anytime soon.

 

[Jack@European_Parts]

Oil as in turn gas prices are likely to go back up soon. Last I heard the Russians and OPEC are agreeing to slash production.

Nope not quite but close.....they will keep the PSI up and sell the deliveries for just less than it cost to ship across country and so the Shale and US oil mines go BK.

Lunchtime TV news in the UK said demand is 30% down but production (even after the agreement last week to cut production) is only 10% down.

So the problem of nowhere to store the 20% excess oil coming out of the ground isn't going to go away anytime soon.

YUP

Further this is a double play by OPEC, it will lower gas prices to make the EV irrelevant and a second play to keep ICE in full play & outlast the incentives by Gov which are running out!

Then the price will go up like it did in the past, that is why buy oil funds at lows is a good idea.

Trump + politicians paved the way to take the consumers wallet & by lifting the CARB EPA SMOG and CAFE standards.

This will allow the oil fat cats to get richer & by selling old tech big engines that dump and when your SUV costs 125-150 a tank to fill, you won't be a happy camper!

This is why PUCC CF gas engines are coming.......stratified charge is dead!

People are sick of engine failures, time for common sense & proven tech or real innovation.

 

[DV52]

Lunchtime TV news in the UK said demand is 30% down but production (even after the agreement last week to cut production) is only 10% down.

So the problem of nowhere to store the 20% excess oil coming out of the ground isn't going to go away anytime soon.

Dave: my understanding is that negative (futures) price for "oil" was due to traders closing-out their May 2020 positions. I'm told that June 2020 (futures) prices are hovering around $20 - but as time runs-out it will be interesting to see what happens. In truth though as many pundits have identified, current oil futures prices are really reflecting the cost of storage, rather than the value of the underlying.

Uwe is correct in identifying that in an over-supplied market for commodities, value tends to reduce to the efficient price of short-run-marginal cost. Shale oil producers must be very worried!! But as we have seen in other markets, the overlay of futures instruments onto a physical commodity market can play havoc on what economic theory says is a rational price for the underlying: Producers that should be long in the market can look like buyers -depending on their futures positions (and vice-a-versa for buyers)!!

Australia's far sighted leaders saw the answer to the northern hemisphere's problem many years ago. Instead of using WTI, we use a system where a cartel of similarly minded producers simply meet periodically to determine what buyers will pay - much better (not)!!

Don

 

[Jack@European_Parts]

Yeah well often not informed morons begin trading commodities options and at expiration fail to realize they must take delivery of the actual product as part of the "OPTION"!

 

[DV52]

Yeah well often not informed morons begin trading commodities options and at expiration fail to realize they must take delivery of the actual product as part of the "OPTION"!

Jack: it really depends on the type of option as to what happens at the expiration date. But, it's probably more accurate to say that contract holder generally must take the actual product, rather than interpose the word "delivery" because that suggests that the commodity in the financial instrument needs to be physically transported if/when the option is exercised. As we both know, one of the many benefits of futures instruments is for swaps to happen at various physical delivery points in the market - this sometimes obviates the need for transportation under the contract.

Of course, the negative WTI price doesn't fit your scenario because (most likely) those buying/selling May 2020 futures were all experienced traders: the price outcome was simply the result of various traders taking various positions that needed to be brought-to-account!

Don

 

[Jack@European_Parts]

Don,


Wanna get credits and raise the Exxon Valdez to patch it and fill it?.
https://www.google.com/amp/s/api.na...019/03/oil-spills-30-years-after-exxon-valdez

 

[Uwe]

Somebody's margin clerks were too slow the other day:
https://www.businesswire.com/news/h...-Brokers-Issues-Statement-Crude-Oil-Contracts

Several Interactive Brokers LLC (“IBLLC”) customers held long positions in these CME and ICE Europe contracts, and as a result they incurred losses in excess of the equity in their accounts. IBLLC has fulfilled the firm’s required variation margin settlements with the respective clearinghouses on behalf of its customers. As a result, the Company has recognized an aggregate provisionary loss of approximately $88 million.

-Uwe-

 

[Uwe]

Jack: it really depends on the type of option as to what happens at the expiration date. But, it's probably more accurate to say that contract holder generally must take the actual product, rather than interpose the word "delivery" because that suggests that the commodity in the financial instrument needs to be physically transported if/when the option is exercised. As we both know, one of the many benefits of futures instruments is for swaps to happen at various physical delivery points in the market - this sometimes obviates the need for transportation under the contract.

The US WTI futures contracts that went negative the other day have pretty specific delivery requirements.
https://www.cmegroup.com/trading/energy/crude-oil/light-sweet-crude_contract_specifications.html

Delivery Procedure:

Delivery shall be made free-on-board ("F.O.B.") at any pipeline or storage facility in Cushing, Oklahoma with pipeline access to Enterprise, Cushing storage or Enbridge, Cushing storage. Delivery shall be made in accordance with all applicable Federal executive orders and all applicable Federal, State and local laws and regulations.

At buyer's option, delivery shall be made by any of the following methods: (1) by interfacility transfer ("pumpover") into a designated pipeline or storage facility with access to seller's incoming pipeline or storage facility; (2) by in-line (or in-system) transfer, or book-out of title to the buyer; or (3) if the seller agrees to such transfer and if the facility used by the seller allows for such transfer, without physical movement of product, by in-tank transfer of title to the buyer.

Delivery Period:

(A) Delivery shall take place no earlier than the first calendar day of the delivery month and no later than the last calendar day of the delivery month.

(B) It is the short's obligation to ensure that its crude oil receipts, including each specific foreign crude oil stream, if applicable, are available to begin flowing ratably in Cushing, Oklahoma by the first day of the delivery month, in accord with generally accepted pipeline scheduling practices.

(C) Transfer of title-The seller shall give the buyer pipeline ticket, any other quantitative certificates and all appropriate documents upon receipt of payment.

The seller shall provide preliminary confirmation of title transfer at the time of delivery by telex or other appropriate form of documentation.

-Uwe-

 

[Jack@European_Parts]

Oh did someone say Deli sandwiches with egg and cheese hmmmm or did they use the word Delivery?

 

[DV52]

^^^Uwe: Interesting WTI provisions - thanks for the information

I was responding more generally based on my time in the gas industry (CH4, rather than what you guys call "gas"). We often had delivery clauses in our futures contracts that swapped commodity quantities at different storage locations (read, market price points - with buyer/seller agreement, of course). In a sense, option 3 in the "Delivery Procedure" clause is a bit like this, but the WTI location is indeed very specific.

I guess that having such a precise delivery point for ALL WTI futures contracts addresses one of the classic problems with pricing a commodity that is physical in a market with a large land area. Ostensibly, the problem is; when the delivery period for a commodity is much longer than the time in which changes occur in demand - at what location(s) in a financial market should the commodity be priced (i.e. should the commodity be priced at the point(s) of production, or at the distribution facilities close to demand point(s))?

We had this same problem down here in Australia (which has a large land area-like USA) when we were designing our energy markets. Everyone down here said that designing our electricity market would be more difficult because commodity quantities can change instantaneously. But the electricity market design didn't need to consider the problem of the impact of delivery time on commodity value. Gas is a physical product (unlike electricity- which is ephemeral commodity) and it travels relatively slowly in a pipeline. When we were designing our gas market, we found that accommodating the slowness of gas molecule movement complicated market pricing significantly. Oil delivery is much slower than gas molecule movement in a pipeline and I suspect that WTI futures solved this same dilemma by ignoring the problem entirely (i.e. by defining the commodity price at a specific point in Payne County, Oklahoma - which I understand is at an oil production point)

Don

 

[Uwe]

I suspect that WTI futures solved this same dilemma by ignoring the problem entirely (i.e. by defining the commodity price at a specific point in Payne County, Oklahoma - which I understand is at an oil production point)

Cushing Oklahoma is not so much a production point, as giant nexus of oil pipelines, handily co-located with large amounts of tank storage (something like 90 million barrels worth!). Take a look at it with Google Satellite view.

Natural Gas (CH3) futures are quoted at the Henry Hub in Erath, Louisiana, which is a major gas pipeline nexus with considerable storage capacity. Normally, prices don't vary much from across the country from there, however, I've seen spot prices in NY and New England run as much as 2-1/2 times higher than the Henry Hub price during extreme cold weather in that region, when the demand exceeded the capacity of the pipelines to bring it there.

-Uwe-

 

[Jack@European_Parts]

Stansdingleberry...... Hey where is dingle anyway?
https://orders.stansberryresearch.c...MKT457017&step=start&assetId=AST136159&page=1

 

[Jack@European_Parts]

Economic prison ....
https://www.bloomberg.com/amp/news/...-favors-allowing-states-to-declare-bankruptcy

McConnell Says He Favors Letting States Declare Bankruptcy

 

[Uwe]

Economic prison ....

Yes, a number of states have locked themselves into economic prisons, particularly with respect to public employee pension plans. I believe Illinois is at the top of the list, and California isn't far behind. Now they cry poor and want a bailout from the FedGov, i.e. the rest of us who live in states that have been more fiscally responsible.

https://www.realclearpolitics.com/a..._rob_covid-19_funds_to_bail_out_pensions.html

https://www.dailysignal.com/2020/04/19/3-reasons-why-states-shouldnt-get-a-congressional-bailout/

-Uwe-

 

[Jack@European_Parts]

https://www.fool.com/amp/investing/...ndustrys-ticking-timebomb-how-plunging-u.aspx

 

[Jack@European_Parts]

https://www.cnbc.com/amp/2020/04/28...all-business-loans-going-to-larger-firms.html

'I just want to know who made the bad loans' — Cramer blasts small business loan program

 

[Jack@European_Parts]

Bubble popped last year!

Auctions are jam packed!
https://www.bloomberg.com/amp/news/...in-the-ocean-and-reveal-scope-of-u-s-car-glut

SUVs Get Parked in the Sea, Revealing Scope of U.S. Auto Market Glut

 

[Jack@European_Parts]

https://amp.cnn.com/cnn/2020/05/04/...-closing-sales-delaying-bankruptcy/index.html

Some retailers are too broke to go bankrupt